MOUNTAIN VIEW, Calif.-Microsoft thinks the TV is about ready for software.

Granted, Microsoft has been thinking that for more than a decade. But there's some reason to think that this time the folks from Redmond could be right.

Although the first stabs at interactive TV fizzled, WebTV topped out as a niche product and most of the cable industry decided it could live without Microsoft running its set-top boxes, a key technology shift may have cracked open the door that Microsoft has been knocking on all these years.

The change is TV's move beyond satellite and cable to so-called IPTV, that is, television that is distributed using Internet Protocol technology, usually by telephone companies. On Monday, Microsoft is introducing the latest version of its software, adding support for sharing digital photos and music throughout the home. And unlike its past TV efforts, Microsoft is finding some big name companies willing to bet on its technology.

IPTV has been on the cusp of reality for some time, gaining increasing importance as telecommunications companies feel the pinch in their telephony business from Internet-based calling and look to offer a "triple play" of voice, video and Internet services. But after years of talking about offering TV, the telephone companies are starting to invest serious dollars in their IPTV efforts.

Microsoft's entry into IPTV had humble origins. Back in 2002, most of the company's TV unit was focused on developing software for cable set-top boxes. But two people--Jim Baldwin and Peter Barrett--were thinking about sending video streams over the Internet.

The pair leased some business DSL lines and used Microsoft's Xbox development kit as a rudimentary set-top box. "We put Xbox development kits in about 10 people's houses in Mountain View and ran some video channels over it," Baldwin said.

By the next year, the two were ready to take their show on the road. They packed up the Xbox units, a head-end system and trekked to the ITU show in Geneva. At the show, Microsoft succeeded in piquing the interest of a number of companies including Swisscom and Bell Canada.

Even as Microsoft continued to develop the software, it invited telecommunications companies to start trials of their own, with Swisscom among those that signed on to try it out. Companies often used their own employees as guinea pigs. AT&T's was the first serious commercial trial, starting in the fall of 2005. The team has grown from just Baldwin and Barrett to a few hundred workers, and IPTV is frequently touted by Microsoft as one of its emerging businesses that is nearly ready to "pop."

Microsoft's top executives have acknowledged that the company was way early in the TV space. Its investments in the cable industry did not give the company the entree it hoped. Its Ultimate TV product a few years later won some fans among TV enthusiasts for its picture-in-picture and video-recording abilities. But the high cost led to little mainstream appeal, and Microsoft stopped pitching it not long after it launched. Even IPTV is moving slower than the company has hoped.

"We've been surprised and sometimes disappointed by how long it takes before things that seem so obvious are ultimately fully realized," Craig Mundie, Microsoft chief research and strategy officer, said in an interview last month. "The IPTV vision as we know it today started out as the interactive TV in 1993, and it's only getting broad deployment today, almost 14 years later."

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It's hard to say just how much Microsoft has spent on its TV efforts. The company invested $1 billion in Comcast and $5 billion in AT&T back when Ma Bell was buying cable company Media One. In terms of its own products, Microsoft Chairman Bill Gates said in a speech back in 2004 that the company had spent upward of half a billion dollars.

"We got involved in TV-related software way too early, and we spent $500 (million) or $600 million before its time," Gates said in that speech.

Microsoft is trying to learn from its folly and not get too far ahead of where the business is. After initially touting all the amazing new features that IPTV would herald, Microsoft has actually gone to market with a product that looks and feels a lot like traditional cable or satellite.

Longer-term, though, the company knows it needs to make sure it has something that makes its technology stand out.

"When you compete on price and channels you are basically playing everyone else's game," said Paula Reinman, director of market intelligence for Microsoft TV.

The company is trying to shift away from its reputation of creating products with tons of features but less-than-elegant integration. Instead, the software maker is focused on the basics. For example, while the technology allows for viewing, say nine channels at once, Microsoft is not rushing to do that, instead focusing on trying to offer fast channel changing and other things that improve the TV watching experience.

Microsoft is plotting out plenty of possibilities for the future, but trying to keep the bulk of its energies focused on the present. It calls the strategy "Think big, start small, move fast."

And the company is still in the small stage, to be sure. Of the 17 customers Microsoft has announced, only nine have launched commercially, accounting for about 100,000 users in aggregate.

"We are just getting to the point where IPTV is more than just an experiment," said Vince Vittore, a senior analyst with Yankee Group Research. "Microsoft and operators are still getting their hands around the technology. So it's going to take time."

"We are just getting to the point where IPTV is more than just an experiment."

--Vince Vittore, senior analyst, Yankee Group Research

Many of its future efforts are in the research stages. In recent weeks, the TV team has been doing a lot of user testing, both in homes and with people coming in to the Mountain View, Calif., labs to talk about and show how they use their TV.

One of the big challenges the team is tackling is the notion of a program guide. It made a lot of sense when there were only a couple dozen channels and shows were watched only at the time they were broadcast. However, the move from analog to digital has paved the way for far more channels, while digital video recording and video-on-demand are further increasing the number of options.

It's a challenge for the whole industry, but one that Microsoft thinks could benefit it, provided it can come up with a good answer.

"There's a limit to how much choice is good," said Sal Arora, director of product management for Microsoft TV. "What am I going to do with 1,000 channels?"

It's not that people don't want that many options; it's just hard to find what you want, especially using a program guide and remote control. Arora pointed to Amazon.com as an example. The company has 1 million books, but the interface is good enough that it doesn't feel like you have to browse through all those titles to find something you want.

In a recent research study, Microsoft has been peppering users with questions about how they find things to watch. They are asked about Netflix, Blockbuster Total Access and iTunes. While Microsoft is interested in how much use their rivals are getting, the primary goal is to try to get a sense of how well those services are enabling people to find things from a panoply of choices.

The company is looking at a variety of options, from embedding more metadata in program listings to adding social-networking features so that people can be referred to programming by friends or see what's being most watched in general.

"Those things, I think, will become very relevant and important very quickly," Arora said.

For now, though, Microsoft is trying to sell phone companies and their customers on IPTV as a better alternative to satellite and cable. Reinman, who has been helping Microsoft and its partners hone their pitch, has explored the ways people use TV and has some theories on who might be the early customers for IPTV. And it's not necessarily the techno geeks that are the typical early adopters of Microsoft's technology.

A few different personality types are ripest for the picking, Reinman said. One is the person who is into their TV, but not so much into other types of technology. Such users are willing to pay for new TV features and are actually less likely than the average person to have high-speed Internet access. Another is the individualist, the type of person who looks at a lineup of 200 channels and doesn't see anything they want to watch.

The one thing Reinman definitely does not want to see is the company pitching the technology itself. The phrase IPTV should never be on anything that lands in customers' hands. "I would never use those four letters in a consumer message," she said. "This is really about the best TV experience you can have."